ECB salvation for European exporters seen unlikely

By: David WiganPublished on: Thursday, May 29, 2014

With ECB policymakers meeting in Frankfurt next week, European exporters will watch with bated breath amid expectations the central bank will take action that helps weaken the euro. However, those anticipating fireworks might be disappointed, analysts say.

The
ECB’s June 5 meeting is widely predicted to be a
defining moment of the year, setting the tone for future
monetary policy and potentially offering radical policies to
help Europe’s ailing economy.

European consumer price inflation increased just 0.2% in the
first quarter, according to the Organization for Economic
Co-operation and Development, while growth might be stalling,
coming in at just a 0.2% in the first three months of the year,
the same as in the final quarter of 2013.

Given the disappointing
economic situation, the consensus among the region's exporters
is that the central bank needs to do something to weaken the
euro. The common currency has traded in a range between $1.3350
and $1.39 since September, compared with around $1.22 in July
2012.

Since the first quarter of 2013, euro-area GDP has accelerated
by 1.6 percentage points, but the contribution from net exports
has decelerated by 0.4 percentage points, according to Deutsche
bank data. That situation is in contrast to the recovery after
the slump of 2008/2009, when export-dominated manufacturing
– reflecting normalization in world demand –
led the rebound.

This time, however,
foreign demand is unlikely to come to the euro’s
rescue, with weak Chinese growth and challenges in the US and
elsewhere undermining that potential driver of recovery.
Meanwhile capital is pouring into Europe after the
normalization of the sovereign debt crisis and steady demand
for bonds and equities.

ECB president Mario Draghi said in recent days the bank must be
"particularly watchful" for any negative price spiral in the
eurozone, adding "more pre-emptive action may be warranted" to
guard against a drop in price expectations.

Draghi reiterated his view that although the eurozone faces a
"prolonged" period of low inflation, and that deflationary
expectations could "take hold". The eurozone issues
its May flash inflation data on Tuesday, with Reuters consensus
estimate of economists forecasting a 0.7% year-on-year
increase.

Meanwhile, monetary conditions elsewhere offer little solace
for European exporters. Long-term US and Japanese rates this
week hit the lowest level for a year, undermining potential
carry trades.

All of which means the June ECB meeting has garnered an
additional sense of importance, with many banks predicting the
governing council will cut its deposit rate to below zero,
effectively charging banks for holding their cash.

If that happens, it will be the first time that a leading
central bank has crossed the threshold into negative
territory.

Also possible is new long-term cash for banks to lend
on to small and medium-sized firms, and new
private asset purchase plans (to include
ABS).

And analysts question whether the other measures alone will be
enough to move the euro out of its elevated range, despite a
slight weakening in recent days that moved it outside its
200-day moving average.

"The recent small sell-off we have seen in the euro has
probably already priced in what we are going to see from the
ECB," says Maurice Pomery, London-based chief executive officer
at Strategic Alpha.

"I don’t think they will do full QE yet and even
if they cut the refi rate to below zero, it’s
really more a gesture than anything that is going to have a
major impact."

Analysts at Crédit
Agricole are among those echoing that sentiment, advising
clients in a recent note against selling the euro "due to the
heightened risk of the ECB disappointing elevated market
expectations".

Meanwhile, the bank
reports that sellers of the currency are mainly private clients
and hedge funds, suggesting upside risk should the ECB fail to
deliver.

For European exporters
waiting for the
region’s currency to help them out of a
hole, it appears they should not be holding their breath.

Further reading on Euromoney

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